In my final class lecture this week on ancient and medieval economic thought, I discussed the work of Nicholas Oresme (1320 to 1382), a French Roman Catholic bishop who was also a philosopher, mathematician and an economic thinker.  I found it interesting to see a career link between mathematics and economics so early on.   More interesting, he appears to be the first monetary economist with what is probably the first comprehensive work on money titled De origine, natura, jure et mutationibus monetarum,  translating into A Treatise on the Origin, Nature, Law and Alterations of Money.  Oreseme seems to be the first articulate proponent of a stable rules based monetary environment as he argues that as the laws of a country should not be changed without a demonstrated need, neither should the monetary system. 

According to Oresme, a government should have a monopoly to mint and issue coinage.  However, the coinage does not belong to government but is a form of common property belonging to those community members who have acquired it in exchange for goods and services.  Debasing the coinage allows government to profit at the expense of the community and by repeated debasement of the currency, it was theoretically possible to take all the wealth from the King’s subjects.  At best, the monarch should be allowed a small transactions cost based fee due to his role as sovereign, which would cause a small deviation of the intrinsic value of the coin in terms of metal content from its face value.   Oresme argues that it is the community alone that should decide what the deviation from the intrinsic value of the coin should be, which is suggestive of some kind of independent monetary authority but little detail is provided.  Oresme also foreshadows Gresham’s Law by arguing that debasement of coinage will lessen the amount of monetary material in a state because gold and silver would be carried abroad to where they commanded a higher price.  

Moving forward, what insights are there from this thinking for today?  We are in a precarious economic environment where there are renewed calls for quantitiative easing – which involves changes in the monetary system’s supply of money.  When governments engage in quantitative easing they are doing so on behalf of their “communities” and this action does affect the common property nature of the monetary system.  The risk is that quantitative easing might spur inflation, which erodes the purchasing power of money – a modern form of “currency debasement”.  However, in the current environment, quantitative easing is purchasing debt instruments rather than goods and services.  Moreover, some inflation might not be so bad as it can reduce the real value of debt and thus might actually help ease the sovereign debt crisis.  Of course, using inflation generated by quantitative easing to reduce the real value of debt also involves a transfer of wealth towards the governments that have incurred the debt.

Yet, one could also argue that when governments today engage in quantitative easing, they are indeed “the community” because unlike the Medieval period – they are democratically elected rather than feudal monarchies.  Thus, quantitative easing is not directly profiting a “monarch” or the state but the community’s economy, with results like economic stabilization and growth and job creation.  Quantitative easing is therefore engaging in the amount of “currency debasement” we are willing to pay as a community in an effort to deal with the international economic situation.  How much quantitative easing should there be?  I suppose whatever it takes to deal with the problems at hand in terms of restoring a positive economic growth trajectory.  However, if one takes Nicholas Oresme at his word, there would not be very much.  As he writes:

“Sometimes, lest worse befall and to avoid scandal, a community tolerates dishonourable and evil things like brothels.  Sometimes also, by necessity or convenience, vile business is tolerated, like money-changing or evil business, like usury.  But there seems to be no reason on earth why so much gain should be allowed from alteration of coinage for profit.”*

But then, Nicholas Oresme was not dealing with the after effects of a Great Recession, an international financial meltdown and a sovereign debt crisis of global proportions.   While Oresme argued the monetary system should not be altered in the absence of need, even he considered debasement permissible in emergency situations – such as war – when debasement could be considered more like a tax rather than stealing.  Even in the middle ages, policy advisors were prepared to be flexible enough in their recommendations to take changing circumstances into account.

*Quote taken from Rolnick, Velde & Weber, “The Debasement Puzzle: An Essay on Medieval Monetary History,” Federal Reserve Bank of Minneapolis Quarterly Review.